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SEC’s Order and Dissent Highlights Uncertain Regulatory Environment for Digital Assets

By Robert R. Boeche, Partner & Andrew Steiger, Law Clerk of Shustak Reynolds & Partners, P.C. posted on Tuesday, August 3, 2021.

Robert R. Boeche II

Robert R. Boeche II

Partner

Location: San Diego, California
Phone: (619) 696-9500 (Ext. 122)
Direct: (619) 546-5502
Fax: (619) 615-5290
E-mail: [email protected]

In a recent administrative proceeding before the Securities and Exchange Commission, crypto firm Blotics, Ltd., also known as Coinschedule.com, drew civil penalties for violating federal securities laws. On July 14, 2021, the SEC ordered Coinschedule to disgorge its profits earned from touting digital assets on its platform without disclosing its profit motive to potential investors.

The SEC alleged that the website had been compensated for profiling and publicizing more than 2,500 current and upcoming digital token offerings without disclosing this fact. The alleged conduct would violate Section 17(b) of the Securities Act of 1933, which requires the party touting a security to disclose the fact that he or she was compensated, and the amount received. The SEC generally applies the 1946 Howey test to determine whether an asset is an “investment contract” such that securities regulations, like anti-touting rules, should apply. [1] But while the Howey test provides helpful insight, its application to crypto assets can be difficult.

Unfortunately, the order did not explain which of the 2,500+ tokens the Commission considered to be securities, and which it did not. The SEC also stopped short of providing its analytical framework for determining why one digital asset may be deemed a security and not others. Consequently, the order provides little actionable guidance to crypto firms on how to adjust their operations to avoid securities law violations. This can be frustrating to industry professionals and crypto enthusiasts alike who look for guidance in orders like this one to bring clarity to a chronically uncertain regulatory environment.

This frustration has carried over to the SEC itself. Also on July 14, the SEC published a rare self-admonishment highlighting the SEC’s own failure to provide clear definitions and rules to crypto market participants before hammering them with civil penalties and fees. This signals that at least some regulators perceive a sense of urgency with the ongoing rulemaking process, which is usually measured, deliberate, and much slower than ultra-agile crypto market participants may readily tolerate.

As crypto assets are still a relatively new development in finance, it can be anticipated that an added measure of expert interpretation of compliance rules would be required. It is always a good idea to consult with independent counsel about the compliance risks before committing to a new crypto project or investment.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses.
Attorney Robert R. Boeche can be reached in the firm’s San Diego office at (619) 696-9500.



[1] SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

 

 

 
 
 

 

 

 

 

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